Friday, April 8, 2022

Weekly Commentary: Playing with Fire

Please join Doug Noland and David McAlvany this coming Thursday, April 14th, at 4:00 pm Eastern/ 2:00 pm Mountain time for the Tactical Short Q1 recap conference call, “Instability 2022: Inflation, War and China.” Click here to register.

Rate markets are now pricing in a 2.54% Fed funds rate by the FOMC’s December 14th meeting. This is up from 33 bps in October, 82 bps to begin 2022, and 1.30% on March 1st. For the most part, the stock market took this major ratcheting up of tightening expectations in stride.

Curiously, the bond market had seemed determined to remain sanguine. Ten-year yields were at 1.73% on March 4th, with yields only 113 bps above the three-month T-bill rate (25bps over 2-yr Treasuries). Bonds largely dismissed talk of a hawkish rate cycle, not to mention billowing inflationary pressures.

Ten-year Treasury yields surged 32 bps this week to a three-year high 2.71%, with the spread versus three-month T-bills up to 182 bps. It’s worth noting that 10-year yields were trading at 2.45% Tuesday morning when the headline hit, “Brainard: Fed to Shrink Balance Sheet at Rapid Pace as Soon as May.” Yields immediately surged 10 bps and didn’t look back. The Nasdaq100 Index sank 2.2% in Tuesday trading, and was down another 2.2% Wednesday. The Semiconductors dropped almost 7% in two sessions, while the Broker/Dealers were down almost 7.5% at Thursday’s intraday lows.

Markets have generally been okay with even the prospect of an aggressive rate hike cycle. But when talk shifts to the Fed’s balance sheet, things instantly turn dicey. Brainard was front-running the markets’ anxiously awaited - and Powell promised - QT (“quantitative tightening”) details in Wednesday’s release of the minutes from the FOMC’s March 16th meeting: “Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.”

A $95 billion monthly reduction of assets (removal of monetary stimulus) would be a case of the Fed Playing with Fire. Granted, there is currently a buffer of excess funds (remnants of the latest $5TN QE program) in the system. If markets remain stable, the Fed can surely proceed to extract some of these funds. Market stability, however, is today “a big if”. Risk of a destabilizing bout of de-risking/deleveraging remains elevated. And as yields have spiked higher, talk has returned to liquidity issues in Treasuries, MBS and interest-rate hedging markets. 

I am reminded of how abruptly the Fed shifted in September 2019 from gradual balance sheet reduction to another round of QE.  Liquidity is the weak spot for highly levered market Bubbles.

This week was notable for the rout in EM bonds. Local currency yields were up 76 bps in Hungary (6.80%), Poland 66 bps (6.03%), Brazil 58 bps (11.89%), Mexico 39 bps (8.70%), Czech Republic 27 bps (4.04%), and Romania 29 bps (6.47%). Dollar-denominated EM bonds were also pounded. Turkey’s dollar-denominated bond yields surged 43 bps (8.71%), Chile 38 bps (3.67%), Indonesia 27 bps (3.44%) and Saudi Arabia 23 bps (3.39%). Ten-year yields were up 20 bps in Canada (2.63%), 14 bps in the UK (1.75%), and 13 bps in Australia (2.96%)

For now, global bond yields are in the throes of a sharp upward adjustment. German bund yields jumped 15 bps this week to a more than four-year high 0.70%, with two-year German yields up 11 bps to the high (0.05%) all the way back to June 2014. With a big election Sunday, French yields spiked 24 bps to highs (1.25%) since July 2015 (spread to bunds widest since March 2020). Italian yields surged 30 bps to an almost three-year high 2.40%. Greek yields jumped 22 bps (2.88%), Portugal 26 bps (1.64%), and Spain 23 bps (1.70%), all multi-year highs that are stirring memories of the European “doom loop.” European bank stocks dropped 2% this week, with the euro sinking 1.5% (near May 2020 lows).

With inflation breathing down their necks, the Fed has commenced what markets now anticipate will be the most aggressive tightening cycle since 1994. Additional context is helpful. From my analytical perspective, if Fed hikes meet current market expectations, it would be the FIRST actual tightening cycle since 1994. 

That cycle’s acute bond and derivatives market instability spurred a major shift in the execution of Fed interest-rate policymaking. Going forward, the Fed would be compelled to signal well in advance its rate intentions and, when implementing higher rates, would proceed with caution so as to not upset the markets. It was the dawn of New Age Pain-Free “Tightening.” And this evolution in monetary doctrine did absolute wonders for the financial markets, and, in particular, leveraged market speculation. Nice and gradual rate moves could now unfold without inducing a tightening of Credit or financial conditions more generally.

It was a miracle. Permanently loose financial conditions were left unchecked to fuel market and economic booms. Of course, runaway excess would put system stability at great risk. But bursting Bubbles would see the Fed respond with whatever monetary stimulus necessary to resuscitate Bubble excess. It wasn’t that inflation was not a problem. It was that the inflationary fuel continued to gravitate to the markets, with resulting asset inflation and Bubble Dynamics. The Federal Reserve could just focus on ensuring robust asset markets, while basically disregarding consumer price inflation.

The previous cycle enjoyed incredible staying power, and it will be difficult for most to accept that such a rewarding era has run its course. Consumer price inflation has returned with a vengeance to become a critical problem. And it’s amazing to witness the transformation of the Fed “doves”: Inflation actually hurts the least fortunate the most. Centuries of history; Monetary Management 101.

Federal Reserve governor Lael Brainard, from her speech “Variation in the Inflation Experiences of Households,” April 5, 2022: “Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone.”

It is of paramount importance to get inflation down. Accordingly, the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19. The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee's Summary of Economic Projections. I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year, with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves.

April 5 – CNBC (Jeff Cox): “San Francisco Fed President Mary Daly is worried about inflation, telling an audience… that the high cost of living is causing a heavy burden on society. ‘I understand that inflation is as harmful as not having a job,’ she said, ‘that if you have a job and you can’t pay your bills, or I feel like I can’t save for what I need to do, then that’s keeping you up at night.’ ‘And our goal is to make sure that people don’t stay up worrying about whether their dollar today will be the same and worth a dollar tomorrow,’ she said…”

Heads shaking, market professionals these days must be questioning who on the FOMC has their interests at heart. Still, markets believe the Fed has their backs. The Fed has no choice, unless they are willing to risk seeing everything come crashing down.

After a few decades of drifting ever deeper into the muck of inflationism, it’s at least encouraging to see the Fed commence the return to a more traditional inflation focus. I remain skeptical of this tightening cycle’s staying power. It’s also worth noting the unity around the concept of a “neutral rate” – “the rate that neither restricts nor spurs economic growth.” While an interesting theoretical concept, the “neutral rate” does not exist in reality, and thus is a dead end as a guide for policymaking.

Markets these days dictate system Credit Availability and financial conditions more than ever before. And there is certainly no “neutral” Federal Reserve rate that will magically return even a semblance of equilibrium to Bubble markets. There is no “neutral rate” as this point to smooth the boom and bust cycle that has haunted our system for the past 30 years.

The thought that the Fed can raise rates to the right level to orchestrate a coveted “soft landing” is no more than wishful thinking. Instead, the tightening cycle appears poised to proceed until “something breaks.” And when exactly that occurs has much more to do today with speculative market dynamics and geopolitics than with a particular interest-rate.

It is also important to appreciate that this is the first tightening cycle since the adoption of QE. This significantly complicates both the market environment and the Fed’s tightening challenge. The Fed has too many times in the past responded to market stress with pampering rate cuts and QE liquidity support. Bonds, today seeing Bubble fragility everywhere, price in the likelihood of future rate cuts and additional aggressive Fed purchases. And the resulting artificially low (negative real) bond yields work to sustain loose financial conditions and attendant inflationary pressures. This dynamic is forcing even the Fed doves to speak hawkishly of an aggressive tightening cycle.

I have posited for a while now that China Bubble fragility was a significant factor in the U.S. and global bond markets’ propensity to disregard inflation risk. The Chinese economy and financial system these days face a litany of serious risks.

April 8 – Reuters (Brenda Goh, Roxanne Liu, David Stanway and David Kirton): “Shanghai on Friday announced a record 21,000 new cases and a third consecutive day of COVID testing as a lockdown of its 26 million people showed no sign of easing and other Chinese cities tightened curbs - even in places with no recent infections… Shanghai's outbreak has surpassed 130,000 cases in total, far exceeding the approximately 50,000 symptomatic cases recorded in the original outbreak in the central city of Wuhan… Nomura this week estimated that 23 Chinese cities have implemented either full or partial lockdowns. The cities collectively are home to an estimated 193 million people and contribute 22% of China's GDP. These include Changchun, a major manufacturing hub that has been locked down for 28 days.”

Beijing has a real mess on its hands. “Zero tolerance” has failed to contain highly transmissible Omicron. Major financial and trade hub Shanghai, with its 25 million citizens, suffers 20,000 new daily cases and is locked down indefinitely.

Adopting draconian lockdown restrictions for a chunk of an economy to contain a virus that, in the vast majority of cases, is associated with only mild symptoms (or asymptomatic) sure appears irrational. But China has over-invested in apartments, commercial buildings and manufacturing capacity at the expense of its healthcare system. It lacks the capacity in most cities to manage even a moderate surge in Covid infections, while available services in the countryside are limited in the best of circumstances. While China has high vaccination rates, its older population is less vaccinated and more vulnerable. There are also questions as to the effectiveness of Chinese vaccines, though large numbers of recent asymptomatic cases are encouraging.

From Friday’s Wall Street Journal (Lingling Wei, Stella Yifan Xie and Natasha Khan): “Yet Covid-19 has since become more infectious, the Chinese economy more fragile and the stakes for Mr. Xi higher. He seeks a third five-year term as China’s leader later this year. ‘Xi is boxed in,’ said Minxin Pei, a professor of political science at Claremont McKenna College and editor of China Leadership Monitor, a quarterly journal on Chinese politics. ‘Changing the zero-Covid policy now would raise more questions about his leadership. It’s politically untenable.’”

China’s Omicron wave will pass. They could be in for some rough months, especially if Beijing doesn’t ease up on “zero tolerance.” China’s economy was faltering prior to Omicron. Meanwhile, risk to already strained global supply chains appears significant. But when it comes to Covid, analysts and markets have grown comfortable “looking over the valley.” I would warn against complacency.

Covid’s timing continues to utterly amaze. Beijing’s Covid management gloating is coming back to slap them right across in the face. And Omicron is having its day after Chinese developers have suffered a crisis of confidence and apartment sales have collapsed. These onerous – borderline inhumane – lockdown measures come with Chinese citizens’ heads already spinning. Apartments were supposed to be a guaranteed path to wealth accumulation. Robust economic growth was virtually guaranteed. Adept management by the great Beijing meritocracy was to ensure ever increasing wealth and prosperity. Moreover, stability and security were the communist party’s overarching mandate.

The headline for the above WSJ article: “Shanghai’s Omicron Outbreak Corners Chinese Leader.” From the FT: “Shanghai Lockdown Tests the Limits of Xi Jinping’s Zero-Covid Policy.” Bloomberg: “Shanghai's Covid Lockdown Risks Becoming Biggest Crisis of Xi's Tenure.” And from the New York Times: “The ‘China Model’ is Being Tested by Covid, Russia and the Economy. And It’s Coming Up Short.”

I don’t see signs of imminent unrest, but the Chinese people are clearly growing increasingly frustrated. Waning confidence in government management has only accelerated with the lockdowns. That Beijing was not better prepared to deal with Omicron outbreaks is not a confidence builder for a population already feeling the ground trembling beneath their feet. And how could many Chinese today not have serious questions about Beijing’s judgment now that its partner “without limits” is fighting a war with barbaric tactics and unrelenting criminal attacks on innocent civilians?

The situation in China has deteriorated so quickly that Beijing is being forced to implement aggressive stimulus measures. Rate cuts could come as early as next week. I expect stimulus measures to be even less effective than the Fed’s series of 2007 and early-2008 rate cuts. Such measures work like magic when speculative impulses remain energized – when Bubbles are inflating. Their potency diminishes rapidly as confidence wanes – when Bubbles are deflating and Greed has shifted to Fear. I doubt general confidence recovers much post-Omicron.

The various impacts the war in Ukraine will have on China are unknown. Revelations of atrocities in Bucha, Mariupol, Borodianka, the missile attack on the train station in Kramatorsk, and brutality against civilians in scores of cities and villages throughout Ukraine, have changed the trajectory of the conflict. The West is more unified and determined that Russian aggression cannot succeed. The likelihood of a negotiated settlement anytime soon seems remote.

Reuters: “The battle for Donbas will remind of World War Two with large operations maneuvers and thousands of tanks, planes and armored vehicles, Ukrainian Foreign Minister Dmytro Kuleba warned on Thursday at NATO.”

NATO will now significantly step up the flow of military assistance into Ukraine, including sophisticated S-300 air defense systems, tanks, heavy weaponry and armored vehicles, along with additional Javelin anti-tank missiles, Stingers, drones and other weaponry. With each passing week, the war in Ukraine appears less a proxy war and more a direct conflict between Russia and the U.S./NATO coalition. It’s difficult to see Russian sanctions dissolved so long as Putin is in power.

The ruble was up 6.3% this week, with Russia’s currency having now recovered the entire huge loss suffered at the start of the war. I couldn’t help but ponder China’s possible stabilizing role. Secretary of State Blinken stated the ruble’s recovery is “not sustainable.”

China a few weeks back called the West’s sanctions “outrageous.” The sanction noose now tightens by the week. Beijing was likely banking on the war being resolved quickly. But it now appears increasingly likely that Russia will require major financial, economic and military support from its partner “without limits.”

April 6 – Bloomberg: “The European Union’s foreign policy chief described a summit with Chinese President Xi Jinping as a ‘deaf dialog,’ casting doubt on how much cooperation the Asian nation will offer to end the war in Ukraine. ‘China wanted to set aside our difference on Ukraine,’ said Josep Borrell, who accompanied European leaders in talks with Xi last week. ‘They didn’t want to talk about Ukraine. They didn’t want to talk about human rights and other issues, and instead focused on the positive things.’ Borrell told the European Parliament… that ‘the European side made clear that this compartmentalization is not feasible, not acceptable,’ adding: ‘For us the war in Ukraine is a defining moment for whether we live in a world governed by rules or by force.’”

Does China pursue clandestine support for as long as it can get away with it? Or might Beijing see the writing on the wall – and make the decision to openly buttress Russia with concurrent efforts to placate the West, while scurrying to erect its side of the new economic “iron curtain”?

Everything points to Russia’s invasion of Ukraine as a history-changing development. Let’s hope it doesn’t prove the early onset of WWIII. It does, however, have the appearance of the beginning of a major global economic and financial showdown – a so-called “new world order.” That this is now unfolding with China’s economy and financial system acutely vulnerable adds complexity and great risk. It’s been my long-standing fear that Beijing would somehow blame the U.S. (and Japan) for its post-Bubble hardship. That alarming path is today more palpable than I ever could have imagined.

April 4 – New York Times (Chris Buckley): “While Russian troops have battered Ukraine, officials in China have been meeting behind closed doors to study a Communist Party-produced documentary that extols President Vladimir V. Putin of Russia as a hero. The humiliating collapse of the Soviet Union, the video says, was the result of efforts by the United States to destroy its legitimacy. With swelling music and sunny scenes of present-day Moscow, the documentary praises Mr. Putin for restoring Stalin’s standing as a great wartime leader and for renewing patriotic pride in Russia’s past. To the world, China casts itself as a principled onlooker of the war in Ukraine, not picking sides, simply seeking peace. At home, though, the Chinese Communist Party is pushing a campaign that paints Russia as a long-suffering victim rather than an aggressor and defends China’s strong ties with Moscow as vital. Chinese universities have organized classes to give students a ‘correct understanding’ of the war, often highlighting Russia’s grievances with the West. Party newspapers have run series of commentaries blaming the United States for the conflict.”

For the Week:

The S&P500 fell 1.3% (down 5.8% y-t-d), and the Dow slipped 0.3% (down 4.5%). The Utilities jumped 2.1% (up 6.7%). The Banks dropped 2.3% (down 9.4%), and the Broker/Dealers sank 5.4% (down 8.7%). The Transports slumped 6.7% (down 12.2%). The S&P 400 Midcaps dropped 3.4% (down 7.9%), and the small cap Russell 2000 stumbled 4.6% (down 11.2%). The Nasdaq100 fell 3.6% (down 12.2%). The Semiconductors sank 7.3% (down 20.9%). The Biotechs gained 1.4% (down 3.9%). With bullion rallying $22, the HUI gold index added 0.4% (up 24.6%).

Three-month Treasury bill rates ended the week at 0.67%. Two-year government yields increased six bps to 2.52% (up 178bps y-t-d). Five-year T-note yields rose 20 bps to 2.76% (up 149bps). Ten-year Treasury yields surged 32 bps to 2.71% (up 119bps). Long bond yields jumped 29 bps to 2.72% (up 82bps). Benchmark Fannie Mae MBS yields surged 32 bps to 3.90% (up 183bps).

Greek 10-year yields jumped 22 bps to 2.88% (up 157bps y-t-d). Ten-year Portuguese yields rose 26 bps to 1.64% (up 117bps). Italian 10-year yields surged 30 bps to 2.40% (up 123bps). Spain's 10-year yields jumped 23 bps to 1.70% (up 114bps). German bund yields rose 15 bps to 0.71% (up 88bps). French yields surged 24 bps to 1.26% (up 106bps). The French to German 10-year bond spread widened nine to 55 bps. U.K. 10-year gilt yields rose 14 bps to 1.75% (up 78bps). U.K.'s FTSE equities index jumped 1.7% (up 3.9% y-t-d).

Japan's Nikkei Equities Index dropped 2.5% (down 6.3% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.23% (up 16bps y-t-d). France's CAC40 fell 2.0% (down 8.5%). The German DAX equities index declined 1.1% (down 10.1%). Spain's IBEX 35 equities index rose 1.2% (down 1.2%). Italy's FTSE MIB index declined 1.4% (down 9.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.7% (up 12.9%), and the Mexico's Bolsa index fell 3.4% (up 2.6%). South Korea's Kospi index lost 1.4% (down 9.3%). India's Sensex equities index added 0.3% (up 2.0%). China's Shanghai Exchange declined 0.9% (down 10.7%). Turkey's Borsa Istanbul National 100 index surged 6.3% (up 28.8%). Russia's MICEX equities index sank 6.0% (down 31.5%).

Investment-grade bond funds saw outflows of $1.702 billion, while junk bond funds posted inflows of $296 million (from Lipper).

Federal Reserve Credit last week dipped $3.4bn to $8.899 TN. Over the past 134 weeks, Fed Credit expanded $5.173 TN, or 139%. Fed Credit inflated $6.089 Trillion, or 217%, over the past 491 weeks.

Total money market fund assets dropped $30.8bn to $4.560 TN. Total money funds increased $75bn y-o-y, or 1.7%.

Total Commercial Paper added $4.4bn to $1.067 TN. CP was down $105bn, or 9.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose five bps to 4.72%, the high since December 2018 (up 159bps y-o-y). Fifteen-year rates gained eight bps to a three-year high 3.91% (up 149bps). Five-year hybrid ARM rates increased six bps to 3.56% (up 64bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down eight bps to 4.83% (up 165bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 1.2% to 99.80 (up 4.3% y-t-d). For the week on the upside, the Norwegian krone increased 0.6%, and the South African rand gained 0.1%. On the downside, the euro declined 1.5%, the Japanese yen 1.5%, the New Zealand dollar 1.1%, the Mexican peso 1.0%, the Swedish krona 0.9%, the Brazilian real 0.8%, the South Korean won 0.8%, the British pound 0.7%, the Australian dollar 0.5%, the Singapore dollar 0.5% and the Canadian dollar 0.4%. The Chinese renminbi slipped 0.03% versus the dollar (down 0.14% y-t-d).

Commodities Watch:

April 7 – Bloomberg (Mark Burton and Jack Farchy): “London’s metal traders are still reeling from the historic squeeze in nickel a month ago, but they may not get much time to recover -- inventories across the exchange’s warehouses have dropped to perilously low levels, raising the threat of further spikes in everything from aluminum to zinc. The available stockpiles across the six main contracts on the London Metal Exchange have plunged to the lowest on record in data going back to 1997. Goldman Sachs Group Inc. warned that copper is ‘sleepwalking towards a stockout,’ while freely available zinc inventories shrank by more than 60% in less than three weeks as Trafigura Group booked out large volumes. Nickel itself remains at risk of further turmoil.”

The Bloomberg Commodities Index rallied 2.0% (up 27.5% y-t-d). Spot Gold recovered 1.1% to $1,948 (up 6.5%). Silver added 0.6% to $24.77 (up 6.3%). WTI crude declined $1.01 to $99.28 (up 31%). Gasoline dipped 0.7% (up 41%), while Natural Gas surged 9.8% (up 68%). Copper added 0.8% (up 6%). Wheat surged 7.5% (up 37%), and Corn rose 3.5% (up 28%). Bitcoin sank $3,850, or 8.3%, this week to $42,335 (down 8.5%).

Russia/Ukraine Watch:

April 4 – Reuters (Marko Djurica): “Ukrainian President Volodymyr Zelenskiy said… it had become harder for his country to negotiate with Russia since Kyiv became aware of the scale of atrocities carried out by Russian troops in Ukraine. Zelenskiy spoke on national television from the town of Bucha in the Kyiv region, where tied bodies shot at close range, a mass grave and other signs of executions have been found in territory retaken from Russian troops.”

April 4 – Reuters (Nandita Bose and Alexandra Alper): “Russia probably plans to deploy tens of thousands of soldiers in eastern Ukraine as it shifts its focus to the country's south and east, U.S. President Joe Biden's national security adviser Jake Sullivan said... ‘At this juncture we believe Russia is revising its war aims’ to focus on ‘eastern and parts of southern Ukraine rather than target most of the territory," Sullivan told reporters... The goal was likely to ‘surround and overwhelm’ Ukrainian forces in the region, he said. ‘Russia could then use any tactical success it achieves to propagate a narrative of progress and mask ... prior military failure.’”

April 7 – Reuters (Michelle Nichols): “The United Nations General Assembly on Thursday suspended Russia from the U.N. Human Rights Council over reports of ‘gross and systematic violations and abuses of human rights’ by invading Russian troops in Ukraine. The U.S.-led push garnered 93 votes in favor, while 24 countries voted no and 58 countries abstained.”

April 6 – CNBC (Shivam Patel): “Britain is drawing up plans to send armoured vehicles to Ukraine, according to The Times. Options under consideration in the Ministry of Defence include sending a protected patrol vehicle, such as the Mastiff, or a vehicle like the Jackal, which can be used as a reconnaissance or long-range patrol vehicle, the report said.”

Economic War/ Iron Curtain Watch:

April 5 – Financial Times: “The US and France called for a significant escalation of sanctions against Russia after reports of atrocities by its forces in Ukraine, with Emmanuel Macron urging a ban on Russian oil and coal imports... The French and US presidents… joined a chorus of western condemnation after reports of civilian killings and mass graves emerged over the weekend from Bucha, a city about 25km north-west of Kyiv, and other areas that were until recently under Russian occupation… ‘There are very clear indications of war crimes,’ Macron said… He added: ‘I think that on oil and coal we must be able to move forward. We should certainly advance on sanctions . . . We can’t accept this.’”

April 7 – Reuters: “Russia is facing its most difficult situation in three decades due to unprecedented Western sanctions, but foreign attempts to isolate it from the global economy will fail, Prime Minister Mikhail Mishustin said… Western countries are progressively broadening an array of economic sanctions imposed to try to force Russia to end its military operation in Ukraine and withdraw its forces.”

April 6 – Bloomberg: “Russian inflation remained high in the last week of March, with prices on foods and household products like soap and toilet paper jumping even as consumer demand was hit by sanctions imposed over the invasion of Ukraine. Consumer prices overall rose 0.99% in the seven days ending April 1, down slightly from 1.16% a week earlier… Prices for sugar rose 5.1% on average in the week, while those for onions jumped by 8%.”

April 5 – Financial Times (James Politi and Tommy Stubbington): “The US Treasury said it would halt Russia’s ability to make debt payments in dollars through American banks, bringing Moscow a step closer to a possible default on its obligations to international investors. The move by US authorities threatens to bring an end to a period since the invasion of Ukraine nearly six weeks ago in which Moscow has kept up payments on its dollar bonds, confounding many investors’ expectations that western sanctions and Russian currency controls would drive the country into its first sovereign default since 1998. ‘The US Treasury will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions. Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,’ a US Treasury spokesperson said…”

April 6 – Financial Times (Courtney Weaver, James Politi, Colby Smith and Jasmine Cameron-Chileshe): “The US has imposed its most severe level of sanctions on Sberbank, Russia’s largest financial institution, and Alfa-Bank, the country’s biggest private bank, escalating its economic punishment of Moscow in response to atrocities committed by Russian forces in Ukraine. The announcement… of ‘full blocking sanctions’, which prevent the lenders from transacting with any US institutions or individuals, came after top officials including President Joe Biden warned this week that they were planning to impose harsher restrictions... ‘There’s nothing less happening than major war crimes,’ Biden said…”

April 7 – Politico (Doug Palmer): “The United States… said it was taking enforcement action aimed at preventing three Russian airlines — Aeroflot, Azur Air and UTair — from continuing to operate, both internationally and within Russia itself. ‘With today’s temporary denial orders, the Department of Commerce takes another significant action to hold Putin and his enablers accountable for their inexcusable actions,’ Commerce Secretary Gina Raimondo said… The new ‘TDOs’ are the first enforcement actions taken by the Commerce Department’s Bureau of Industry and Security under the stringent export controls imposed by the United States in response to Russia’s unprovoked and brutal invasion of Ukraine.”

April 3 – Reuters (Guy Faulconbridge): “President Vladimir Putin's rouble payment scheme for natural gas is the prototype that the world's largest country will extend to other major exports because the West has sealed the decline of the U.S. dollar by freezing Russian assets, the Kremlin said. Russia's economy is facing the gravest crisis since the 1991 collapse of the Soviet Union… Putin's main economic response so far was an order on March 23 for Russian gas exports to be paid in roubles… ‘It is the prototype of the system,’ Kremlin spokesman Dmitry Peskov told Russia's Channel One state television... ‘I have no doubt that it will be extended to new groups of goods,’ Peskov said.”

April 5 – Bloomberg (Megan Durisin, Pratik Parija and Irina Anghel): “Across Ukraine’s farm belt, silos are bursting with 15 million tons of corn from the autumn harvest, most of which should have been hitting world markets. The stockpiles — about half the corn Ukraine had been expected to export for the season — have become increasingly difficult to get to buyers, providing a glimpse into the turmoil Russia’s war has wrought in the approximately $120 billion global grains trade. Already gummed up by supply-chain bottlenecks, skyrocketing freight rates and weather events, markets are bracing for more upheavals as deliveries from Ukraine and Russia — which together account for about a quarter of the world’s grains trade — turn increasingly complicated and raise the specter of food shortages.”

April 7 – Bloomberg: “Tankers carrying 22 million barrels of Russian, Iranian and Venezuelan oil are piling up off China, according to Kpler, as the country battles a virus outbreak that’s sapping demand and causing logistics problems. China has been one of the only buyers of sanctioned Iranian and Venezuelan oil over the last few years. The world’s largest crude importer is also still taking Russian supplies… The trade in the discounted oil is now being disrupted by the country’s worsening virus outbreak…”

April 6 – Financial Times (Martin Arnold and Valentina Romei): “The value of global trade fell 2.8% between February and March as Russia’s invasion of Ukraine led to a sharp drop in container ship traffic from the two countries, according to the Kiel Institute for the World Economy. The data from the German research body are the first to indicate how much the conflict in Ukraine and extensive sanctions imposed on Russia by the west have hit global trade since the invasion... The biggest impact was on trade with Russia, as the value of imports into the country fell 9.7% in March from the previous month, while exports fell 5%...”

U.S./Russia Watch:

April 6 – Bloomberg (Annmarie Hordern, Saleha Mohsin, and Nick Wadhams): “The U.S and its Western allies fail to understand that from President Vladimir Putin’s perspective, they are already at war with Russia, said Mikhail Khodorkovsky, the exiled former head of Yukos Oil Co. who was once the country’s richest person. With the U.S. and major powers ramping up sanctions on Moscow, supplying weapons to Kyiv, and training Ukraine’s military, Putin views his nation as essentially being at war with America and Europe on Ukrainian soil, Khodorkovsky said… Western arguments drawing a hard line between conflict on Ukrainian land and the spread of war into NATO members’ territory are a nuance that means little to Putin, said Khodorkovsky…”

April 6 – Reuters (Daphne Psaledakis): “U.S. Secretary of State Antony Blinken said… the killings in the Ukrainian town of Bucha were no random act of a rogue unit but part of a deliberate Russian campaign to commit atrocities… ‘What we've seen in Bucha is not the random act of a rogue unit,’ he said. ‘It's a deliberate campaign to kill, to torture, to rape, to commit atrocities. The reports are more than credible, the evidence is there for the world to see.’”

China/Russia/U.S. Watch:

April 3 – Financial Times (Kathrin Hille): “China reacted mutedly to allegations that Russian troops had committed atrocities against civilians in Ukraine as Beijing attempted to balance its support for Moscow with the growing fallout from the invasion. While governments around the world condemned Russia after photos and videos emerged of unarmed people, some with their hands tied behind their backs, who had apparently been shot in Bucha near Kyiv following the retreat of Russian forces, the Chinese government remained silent... Beijing has refused to define Russia’s attack on Ukraine as an invasion. Although it has expressed concern about the humanitarian consequences of the war and called for a peaceful resolution, China has not censured Moscow and has parroted Russia’s arguments about its alleged security concerns.”

April 4 – Bloomberg (Stephen Stapczynski): “China’s top liquefied natural gas importers are cautiously looking to purchase additional Russian shipments that have been shunned by the market in a bid to take advantage of cheap prices. State-owned companies including Sinopec and PetroChina are in discussions with suppliers to buy spot cargoes from Russia at a deep discount, according to people with knowledge of the matter. Some importers are considering using Russian firms to participate in LNG purchase tenders on their behalf to hide their procurement plans from overseas governments, the people said.”

April 7 – Bloomberg (Martin Quin Pollard): “China warned… it would take strong measures if U.S. House of Representatives Speaker Nancy Pelosi visited Taiwan and said such a visit would severely impact Chinese-U.S. relations, following media reports she would go next week.”

Europe/Russia/China Watch:

April 8 – Bloomberg (Volodymyr Verbyany): “Ukraine’s natural gas grid warned that transit flows to Europe could be affected as Russia and illegal armed groups are disrupting operations at a key compressor station. Occupiers are interfering with operations at the Novopskov gas compressor station in the Luhansk region, Gas Transmission System Operator of Ukraine said… The infrastructure is key for about a third of Russian gas that Ukraine transits to Europe. The grid warned it will be forced to stop operations at the facility in case it loses control of operations.”

April 5 – Reuters (Robin Emmott): “NATO allies would welcome Finland and Sweden into the alliance if they decided to join but any such move is up to the two nations, NATO Secretary-General Jens Stoltenberg said… ‘It's for them to decide of course but if they apply, I expect that 30 allies will welcome them,’ Stoltenberg told a news conference. He said NATO would likely find ways ‘to address the concerns they may have about this interim period between having applied and until the last ratification (by allies) has taken place’, referring to possible Russian retaliation before the pair were fully under NATO protection.”

April 5 – Reuters (Robert Muller and Jan Lopatka): “The Czech Republic has sent T-72 tanks and BVP-1 infantry fighting vehicles to Ukraine, a Czech defence source told Reuters… Public broadcaster Czech Television initially reported the shipment, showing footage on Twitter of a train loaded with five tanks and five fighting vehicles. It said the shipment was a gift agreed with NATO allies.”

Market Instability Watch:

April 6 – Bloomberg (Laura Benitez): “The cost of insuring Russia’s government debt surged to signal a record 99% chance of default within the year after its Finance Ministry paid some of its dollar bonds with rubles. Credit-default swaps insuring $10 million of the country’s notes for one year were quoted at about $7.3 million upfront and $100,000 annually on Wednesday, according to ICE Data Services’ prices... That’s up from about $5 million in advance last week…”

April 6 – Bloomberg (Tommy Stubbington and Polina Ivanova): “Russia moved one step closer to a potential default on its foreign currency debt on Wednesday after the country’s finance ministry said it was forced to make payments to holders of its dollar-denominated bonds in roubles. The decision to pay in the Russian currency comes after the US Treasury department blocked US banks from handling dollar payments from Russia, halting $649mn of interest and principal due on Monday. JPMorgan… declined to process the cash after seeking guidance from US authorities… ‘Due to the unfriendly actions of the US Treasury . . . the Russian Ministry of Finance was forced to involve a Russian financial institution to make the necessary payments,’ the ministry said… Payments will instead be made to rouble-denominated accounts in Russia and the proceeds can be converted into dollars following the ‘restoration of the Russian Federation’s access to foreign currency accounts’, it added.”

April 6 – Bloomberg (Benjamin Purvis and James Hirai): “Money-market traders are betting the Federal Reserve is heading for its most aggressive monetary-policy tightening in almost three decades as it fights a commodity-driven inflation spike. They are pricing in a further 225 bps of interest-rate hikes by the end of the year on top of the 25 bps already delivered in March. The Fed hasn’t done that much tightening -- 250 bps -- in one year since 1994, a famously brutal year for bond investors that even included a 75 bps hike. The last year there was more tightening was in the early 1980s, when Paul Volcker was in charge of the central bank.”

April 5 – Bloomberg (Kim Chipman): “Wild swings in commodities from wheat to crude oil are here to stay with global supply chains getting reassessed in the wake of Russia’s invasion of Ukraine. That’s according to Gregory Broussard, global head of financial trading for agriculture giant Cargill Inc.’s risk management unit. An economic ostracization of Russia is likely to persist even if the war ends, prompting reconsideration of how critical supplies like grain, fertilizer and fuel are sourced and produced, Broussard told Bloomberg... Countries will likely start hoarding commodities as a caution.”

April 5 – Bloomberg (Alfred Cang and Jack Farchy): “JPMorgan… is reviewing its business with some commodity clients after last month’s nickel short squeeze, a move that threatens to drain more liquidity out of the sector. Senior management at JPMorgan has asked teams around the world to conduct fresh due diligence on some existing clients, including metals traders and oil refiners, according to people familiar with the situation. Risk assessments are also being conducted on certain financing functions… The U.S. bank is one of the largest players in global commodity markets and the biggest in metals by far.”

April 4 – Reuters (Marc Jones): “JPMorgan has warned that the combination of Russia’s war in Ukraine and China's ongoing property crash could see the worst wave of corporate defaults since the global financial crisis. A new report from the bank's analysts… estimated the EM-wide default rate would now reach 8.5%, more than double the 3.9% they expected at the start of the year... The volume of riskier ‘high-yield’ EM corporate international market bonds now trading at distressed levels had jumped to $166 billion, the highest since 2009 when the global financial crisis raised the default rate to 10.5%.”

April 4 – Wall Street Journal (David Benoit): “JPMorgan... Chief Executive Jamie Dimon said the U.S. economy is facing unprecedented risks that have him preparing for dramatic upheavals. The head of the nation’s biggest bank offered a largely upbeat view of the economy’s health in his annual letter... Consumers and businesses are flush with cash, wages are rising and the economy is growing rapidly after its pandemic slowdown. While consumer confidence has declined, Mr. Dimon says the more important gauge is booming spending. Yet Mr. Dimon warned that the war in Ukraine could collide with rising inflation to slow the pandemic recovery and alter global alliances for decades to come. ‘They present completely different circumstances than what we’ve experienced in the past—and their confluence may dramatically increase the risks ahead,’ Mr. Dimon wrote. ‘While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes.’”

Inflation Watch:

April 8 – Associated Press (Nicole Winfield): “Prices for food commodities like grains and vegetable oils reached their highest levels ever last month largely because of Russia’s war in Ukraine and the ‘massive supply disruptions’ it is causing, threatening millions of people in Africa, the Middle East and elsewhere with hunger and malnourishment, the United Nations said… The U.N. Food and Agriculture Organization said its Food Price Index, which tracks monthly changes in international prices for a basket of commodities, averaged 159.3 points last month, up 12.6% from February. As it is, the February index was the highest level since its inception in 1990. FAO said the war in Ukraine was largely responsible for the 17.1% rise in the price of grains, including wheat and others like oats, barley and corn.”

April 4 – Wall Street Journal (Sharon Terlep): “Household staples are no longer immune to inflation. American consumers are starting to cut costs on mainstays from toothpaste to baby formula as inflation hits a swath of the economy that had thus far proven resistant to substantial price increases. Procter & Gamble Co., Clorox Co., Kraft Heinz Co. and other consumer-products giants have made a bet that consumers will pay up for household products even as inflation takes hold. Over the past year, the companies have seen profits and market share grow as they have raised prices on products from detergent and diapers to snacks and soda. Now consumers, hit by soaring costs for everything from gasoline to child care, are drawing a line, analysts and retailers say. Shoppers are buying staples in smaller quantities, switching to cheaper, store-name brands and more rigorously hunting for deals.”

April 4 – Bloomberg (Will Wade): “U.S. coal prices topped $100 a ton for the first time in 13 years as Russia’s war in Ukraine upends international energy markets and an economic rebound from the pandemic drives up demand for fossil fuels. Prices for coal from Central Appalachia surged 9% to $106.15 a ton last week, the highest since late 2008… Prices in the Illinois Basin rose to $109.55, topping $100 for the first time in records dating to 2005.”

April 2 – Financial Times (Jude Webber, Daniel Dombey, Andy Bounds and Emiko Terazono): “Jack Ronan’s farm is one of the 10 largest in Ireland. But with war in Ukraine ratcheting up feed prices, he has started to consider culling his herd for the first time since his family began farming in County Tipperary three generations ago. The cost of animal feed, fertiliser and fuel has soared for farmers across Europe as Russia’s invasion of its neighbour squeezes grain supplies and sends the price of energy and other inputs rocketing. Stricken farmers are also having difficulties accessing credit as their financial problems mount. ‘I’ve never seen as big a cash burn, ever,’ said Ronan…”

Biden Administration Watch:

April 6 – Politico (Victoria Guida and Kate Davidson): “The U.S. will deploy tougher sanctions against Russia’s largest financial institution and cut off all American investment into the country, in the latest bid to crush Vladimir Putin’s economy over the invasion of Ukraine. The move announced Wednesday freezes all the assets of Sberbank that touch U.S. banks and will prevent Americans from doing business with the institution, which holds nearly one-third of all the assets in Russian banks. The bank is at the center of Russia’s financial system, and efforts to damage it are likely to send tremors through the nation’s economy.”

April 6 – Bloomberg (Christopher Condon): “Treasury Secretary Janet Yellen said U.S. officials wouldn’t take part in some Group of 20 meetings this year in which Russia is allowed to participate… ‘I’ve made clear to my colleagues in Indonesia that we will not be participating in a number of meetings if the Russians are there,’ Yellen told lawmakers…”

April 6 – Reuters (David Shepardson): “The White House held a classified briefing on Wednesday with some U.S. lawmakers on the dire risks to the American economy from semiconductor supply chain issues as it pushes Congress for $52 billion in funding to subsidize production. White House National Economic Council Director Brian Deese told reporters ‘the best estimates are the lack of available semiconductors probably took a full percentage point off of GDP in 2021.’”

April 6 – Bloomberg (Jordan Fabian and Josh Wingrove): “President Joe Biden’s top economic adviser said the administration has warned India against aligning itself with Russia, and that U.S. officials have been ‘disappointed’ with some of New Delhi’s reaction to the Ukraine invasion. ‘There are certainly areas where we have been disappointed by both China and India’s decisions, in the context of the invasion,’ the director of the White House National Economic Council, Brian Deese, told reporters… The U.S. has told India that the consequences of a ‘more explicit strategic alignment’ with Moscow would be ‘significant and long-term,’ he said.”

Federal Reserve Watch:

April 7 – Associated Press (Christopher Rugaber): “As the Federal Reserve intensifies its efforts to tame high inflation, its top officials are casting their aggressive drive in a new light: As a blow against economic inequality. That thinking marks a sharp reversal from the conventional view of the Fed’s use of interest rates. Normally, the steep rate hikes the Fed is planning for the coming months would be seen as a particular threat to disadvantaged and lower-income households. These groups are most likely to suffer if rate hikes weaken an economy, cause unemployment to rise and sometimes trigger a recession. Instead, some of the most dovish Fed officials, who typically favor low rates to nurture the job market, are now going out of their way to point out ways in which inflation falls hardest on poorer Americans. Curbing high inflation, they argue, is a fairness issue.”

April 5 – Bloomberg (Craig Torres): “Federal Reserve Governor Lael Brainard called the task of reducing inflation pressures ‘paramount’ and said the central bank will raise interest rates steadily while starting balance sheet reduction as soon as next month. The Federal Open Market Committee ‘will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting,’ Brainard said… Policy makers next meet May 3-4. ‘Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery,’ she said, adding that the ‘caps’ set to govern the pace of asset roll-off could be ‘significantly larger’ and phased in much faster than last time around.’”

April 5 – Wall Street Journal (Nick Timiraos): “A top Federal Reserve official said the central bank is strongly committed to taking steps that will reduce inflation this year, including by approving significant reductions in its $9 trillion asset portfolio at its policy meeting early next month. Fed governor Lael Brainard… said she anticipated shrinking the asset portfolio… and a series of interest-rate increases to move the Fed’s policy stance to a more neutral position that no longer provides stimulus to the economy later this year. ‘It is of paramount importance to get inflation down,’ Ms. Brainard said… ‘Accordingly, the committee will continue tightening monetary policy methodically through a series of interest-rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.’”

April 4 – Bloomberg (Rich Miller): “Federal Reserve Chair Jerome Powell and his colleagues are on the march to return ultra-loose monetary policy and accommodative financial conditions to more normal levels. The trouble is, their destination is uncertain and the terrain may be shifting as they forge forward with higher interest rates. Policy makers differ on what the neutral rate -- the rate that neither restricts nor spurs economic growth -- is and couch it in terms that don’t take account of the current high inflation environment. And they’re unsure what effect their removal of monetary largess will have on fickle financial markets and an economy that have grown accustomed to ultra-low rates.”

April 7 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said monetary policy benchmarks using ‘generous assumptions’ suggest that the U.S. central bank may need to raise interest rates to about 3.5% to counter inflation that’s running far too high. ‘One concludes that the current policy rate is too low by about 300 bps, according to this calculation,’ Bullard said… That could suggest, by that measure, the Fed is ‘behind the curve,’ he said. The Fed raised its benchmark overnight rate by 25 bps last month to a target range of 0.25% to 0.5% with Bullard, who favored a half-point increase, the lone dissenter.”

April 5 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George said raising interest rates by half a percentage point in May will be an option as the central bank confronts the hottest inflation in 40 years, though the size of the increase will need to be weighed alongside plans for shrinking the Fed’s $8.9 trillion balance sheet. ‘I think 50 bps is going to be an option that we will have to consider, along with other things,’ George said… ‘We have to be very deliberate and intentional as we remove this accommodation. I am very focused on thinking about how the balance sheet moves in conjunction with policy-rate increases.’”

April 6 – Bloomberg (Bill Dudley): “It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far. Market participants’ heads are already spinning from the rapid change in the outlook for the Fed’s interest-rate policy. As recently as a year ago, they expected no rate increases in 2022. Now, they foresee the federal funds rate reaching about 2.5% by the end of this year and peaking at more than 3% in 2023.”

U.S. Bubble Watch:

April 5 – Bloomberg (Reade Pickert): “The U.S. trade deficit held close to a record in February as the merchandise shortfall shrank and the surplus in services declined, partly reflecting the impact of broadcast rights for the Olympics. The February gap in goods and services trade was little changed at $89.2 billion after a record shortfall in January… The value of imports of goods and services rose 1.3% in February to a record $317.8 billion and exports climbed 1.8% to $228.6 billion. Services imports increased by $2.4 billion to a record $51.6 billion…”

April 7 – Bloomberg (Reade Pickert): “U.S. consumer borrowing surged in February by the most on record, reflecting outsized increases in both credit-card balances and non-revolving loans. Total credit jumped $41.8 billion from the prior month after a revised $8.9 billion gain in January… The increase exceeded all estimates... On an annualized basis, borrowing rose 11.3%. Revolving credit outstanding, which includes credit cards, rose $18 billion. Non-revolving credit, which includes auto and school loans, increased $23.8 billion. Both advances were among the biggest on record.”

April 7 – Wall Street Journal (Sarah Nassauer): “In a bid to keep its supply chain running smoothly, Walmart Inc. is raising wages for in-house truck drivers and expanding a program that trains its existing workers to become drivers. Walmart is raising starting salaries for its truck drivers to between $95,000 and $110,000 a year, up from an average starting salary of $87,000…”

April 5 – Bloomberg (Molly Smith): “Growth at U.S. service providers picked up in March as employment and orders strengthened… The Institute for Supply Management’s gauge of services increased to 58.3 last month from 56.5 in February… Readings above 50 signal expansion. The gain was the first in four months. The group’s index of new orders advanced for the first time since October, while a measure of employment jumped by the most since January 2021 as Covid-19 cases declined. A gauge of business activity… also expanded at a faster pace.”

April 7 – CNBC (Jeff Cox): “The labor market tightened further last week, with initial jobless claims falling to their lowest level in more than 53 years… Initial filings for unemployment dropped to 166,000, well below the Dow Jones estimate of 200,000 and 5,000 under the previous week’s total, which was revised sharply lower.”

April 8 – Reuters (Ann Saphir): “There are early signs of a cooldown in some of the hottest corners of the U.S. housing market, Redfin said…, a fresh indication that high house prices and rising mortgage rates are cutting into homebuyer demand. Among those early tells, according to Redfin: Google searches for ‘homes for sale’ dropped by double digits in Baltimore, Boston, San Francisco and Los Angeles in the second week of March from a year earlier; tours of homes for sale in California were down 21% as of March 31 from the first week of 2022…; Redfin agents in San Francisco, Los Angeles, Washington DC, Boston and Seattle reported a drop in requests for homebuying help at the start of this year compared with last year, even as requests nationwide surged; and agents in California say they are seeing fewer offers on each home than previously.”

April 7 – Wall Street Journal (Veronica Dagher): “Blood pressure is now rising along with home prices and mortgage rates as homeowners fear missing out on the right moment to stake the ‘For Sale’ sign in the front yard. The mood among sellers seems to have shifted in recent weeks from apathy about the slow boil of higher rates to urgency, financial advisers and real-estate agents said. Sellers are seeking advice on how best to time the market and tame their anxiety. ‘The thought of rising interest rates has lit a bit of fire to our timeline,’ said Meri Schroeder, a retiree in Frederick, Md.”

Fixed-Income Bubble Watch:

April 6 – Bloomberg (Elizabeth Stanton and Liz Capo McCormick): “ASL Capital Markets Inc. took the U.S. bond market by surprise this week when it joined the elite club of dealers authorized to do business directly with the Federal Reserve Bank of New York. While key traders at the company have deep roots on Wall Street and decades of experience working for so-called primary dealers, ASL is a name unfamiliar to many people outside the market for repurchase agreements. It’s certainly lesser known than global banks such as Goldman Sachs… and JPMorgan… that constitute most of the existing roster of dealers.”

Economic Dislocation Watch:

April 6 – Bloomberg (Ann Koh): “Congestion at ports in China and elsewhere around the world is gridlocking about 10% of the global container-ship fleet, according to shipping line Ocean Network Express. Ships are ‘locked up waiting in congested areas’ and are burning lots of fuel, Jeremy Nixon, the chief executive officer of ONE, said… ‘If we can release that bottleneck, we can get services back on schedule again.’ The world’s fleet consisted of 5,587 ships carrying 24.7 million TEUs of containers last year… That would mean more than 500 ships are being held up in queues at ports…”

April 7 – Bloomberg (Ann Koh): “Containers full of frozen food and chemicals are piling up at China’s biggest port in Shanghai as the lock down of the city and virus testing means truckers can’t get to the docks to pick up boxes. A shortage of trucks to haul containers from the port is impeding the clearance of imports, Ocean Network Express said… While the port is operating normally, the ‘critically high’ numbers of refrigerated containers and items classified as dangerous goods piled up at two storage yards means some ships carrying those types of cargo may not be able to unload any more boxes at the port, it said.”

April 6 – Financial Times (Thomas Hale, Gloria Li, Harry Dempsey and Eleanor Olcott): “A spate of lockdowns in Shanghai and other Chinese cities is piling severe pressure on transport and logistics across the country, exacerbating the economic fallout of the government’s commitment to its zero-Covid policies as cases continue to soar to record levels. The disruption has affected the trucking industry in particular, which plays a critical role in transporting goods between cities and to some of the world’s biggest ports but is now subject to severe restrictions on drivers and deliveries to locations with positive cases. ‘Trucking is the main issue we have,’ said Mads Ravn, executive vice-president and global head of air freight procurement at DSV, one of the world’s largest freight brokerages. He added that booking truck services was close to impossible and that flight activity into Shanghai Pudong airport was just 3% of its rate last month, with air cargo shipments limited to essential goods such as medicine.”

April 6 – Bloomberg (Linda Lew and Jasmine Ng): “China’s northeastern Jilin province, an auto-making and farming hub, is still reporting thousands of Covid-19 cases a day despite being locked down for almost a month, adding to doubts over the sustainability of the Covid-Zero policy. The province of 24 million people reported more than 2,700 new infections on Wednesday, up from 2,400 the day before. Daily case numbers have been fluctuating between 2,000 and 4,000 since a lockdown was imposed first in the capital Changchun on March 11, then the entire province on March 14.”

China Watch:

April 6 – Bloomberg: “China signaled it would loosen monetary policy as authorities seek to combat an escalating Covid outbreak, slumping property market and spiking commodity prices. Officials will use monetary policy tools at an ‘appropriate time’ and consider other measures to boost consumption, according to the readout from a meeting of the State Council chaired by Premier Li Keqiang... Separately, the central bank published a draft outline for a stability fund to provide support to troubled financial firms. Chinese authorities have made repeated vows to stabilize the economy in recent weeks as Covid restrictions curtail spending and business activity.”

April 6 – Bloomberg: “China signaled it will step up monetary stimulus for the economy, acknowledging that domestic and global risks are now bigger than previously expected. Officials will use multiple monetary policy tools at an ‘appropriate time’ to support the real economy, according to a readout from a meeting of the State Council chaired by Premier Li Keqian… The ‘complexity and uncertainty of domestic and foreign environments have intensified, and some have exceeded expectations,’ the meeting said.”

April 6 – Financial Times (Sun Yu): “China’s strict Covid lockdowns are exacerbating serious shortages of fertiliser, labour and seeds, just as many of the country’s biggest agricultural provinces prepare for their crucial spring planting season. According to official data, as many as a third of farmers in northeastern Jilin, Liaoning and Heilongjiang provinces have insufficient agricultural inputs after authorities sealed off villages to fight the pandemic. The three provinces account for more than 20% of China’s grain production. A drop in output of Chinese spring-planted grains, such as rice or corn, could undermine Beijing’s decades-long effort to achieve self-sufficiency in staple foods, forcing it to increase imports and potentially adding to global food price inflation.”

April 5 – Reuters (David Stanway): “The number of journeys taken over China's three-day Tomb Sweeping Festival holiday tumbled by nearly two-thirds from last year, state media said, citing data from the transport ministry, as authorities battle outbreaks of COVID-19 across the country. The decline was worse than expected and comes as analysts warn that the economic cost of keeping infections to a minimum is likely to soar, with sectors like tourism bearing the biggest brunt. Total trips - including rail, air, waterway and road - reached an estimated 53.78 million over the three-day period beginning on April 3, down 63%... The figure was also about 10% lower than 2020, when parts of China were still recovering from the first coronavirus outbreak that began in central China's Wuhan. Air travel was worst hit, with total passenger numbers falling to an estimated 562,000, down 87% from a year ago and 54% down on 2020. Road journeys fell 53% on the year, and were also slightly lower than 2020.”

April 2 – Financial Times (Primrose Riordan): “Shortages of food and medicine have left residents in China’s biggest city desperate and frustrated as authorities struggle to gain control of a Covid-19 outbreak. Shanghai… implemented two four-day lockdowns of each side of Huangpu river. But as the caseload of the infectious Omicron variant rose rapidly, authorities extended restrictions on parts of the eastern Pudong area, which includes the city’s financial district. Cries for help littered social media this weekend before being deleted by censors…”

April 5 – Wall Street Journal (Liz Hoffman and Tom McGinty): “Chinese corporate insiders have avoided billions of dollars in losses by making well-timed share sales over the past several years, according to an academic analysis of securities filings. Insiders at companies based in China but listed on a U.S. exchange avoided at least $10 billion in losses on trades made between 2016 and mid-2021 by selling stock ahead of significant price declines, the researchers found… One year after insiders at U.S.-listed Chinese companies sold big slugs of stock, those share prices were 21% lower on average…”

April 8 – Wall Street Journal (Rebecca Feng): “Foreign investors cut their holdings of Chinese bonds by more than $15 billion in March, in a record monthly retreat from the world’s second-largest bond market. The selldown probably had several triggers, including concerns about the geopolitical risks of investing in China, broader economic uncertainty and the market’s diminishing yield advantage compared with U.S. bonds… Last month, global investors also withdrew more than $7 billion from onshore Chinese stocks through a trading link with Hong Kong.”

Central Banker Watch:

April 7 – Financial Times (Martin Arnold): “European Central Bank policymakers were split last month over how to tackle soaring inflation with some wanting interest rates to rise this summer, setting up a more heated debate when they meet again next week. A number of ECB rate-setters pushed for ‘a firm end date’ on its net bond purchases to prepare the ground for raising interest rates in the third quarter, warning that otherwise the bank risked ‘falling behind the curve’ on inflation, according to the minutes of the governing council’s March meeting. But others argued for a ‘wait-and-see’ stance because of uncertainty over the economic impact on the eurozone of Russia’s invasion of Ukraine.”

April 4 – Bloomberg (Carolynn Look and Jan Bratanic): “The European Central Bank may end eight years of negative interest rates in late 2022 or early 2023 as it steps up efforts to curb record euro-zone inflation, according to Governing Council member Bostjan Vasle. With Russia’s war in Ukraine stoking already-soaring prices and wages showing signs of a stronger move higher, policy makers must be ‘very careful’ to act before further price pressures materialize, the Slovenian central bank chief said…”

Global Bubble and Instability Watch:

April 5 – Reuters (Saikat Chatterjee and Rachel Savage): “Global sovereign borrowing will reach $10.4 trillion in 2022, nearly a third above the average before the coronavirus pandemic, S&P Global Ratings said… Despite an economic recovery, borrowing will stay elevated because of high debt rollover requirements and war in Ukraine, the ratings agency said... While 137 countries will borrow an equivalent of $10.4 trillion in 2022, an estimated 30% lower than 2020, the overall figure is one-third higher than average borrowing between 2016 and 2019, S&P said.”

April 4 – Bloomberg (Theophilos Argitis): “Canadian businesses are facing unprecedented challenges meeting demand, along with elevated expectations for wages and inflation that will bolster bets for aggressive rate hikes from the Bank of Canada. The central bank’s quarterly survey of executives paints a picture of an economy still pressed up against its limits. Four-fifths of companies said they would have at least some difficulty meeting unexpected demand, a record. About 70% of respondents expect annual consumer price gains to surpass 3% over the next two years, also a record…”

April 5 – The Guardian (Dan Collyns and Tom Phillips): “Peru’s embattled president Pedro Castillo has banned residents of the capital, Lima, from leaving their homes in an attempt to quell nationwide protests over soaring fuel and fertiliser prices caused by Russia’s invasion of Ukraine. In a televised address…, Castillo announced a curfew from 2am until 11.59pm on Tuesday, claiming the measure would ‘protect the fundamental rights of all people’. Castillo said the curfew was a response to ‘violent acts certain groups have created by blocking free transit’ on roads in and out of the capital, where about a third of Peru’s 33 million citizens live.”

April 6 – CNBC (Ravi Buddhavarapu): “‘Gotta go, Gotabaya,’ chanted thousands of people who came out on the streets of Sri Lanka to demand the ouster of President Gotabaya Rajapaksa, defying a state of emergency in what analysts called the Sri Lankan version of the Arab Spring… ‘It’s the Arab Spring in Sri Lanka. It’s a perfect match with the pattern of an Arab Spring: a people’s uprising to end authoritarian rule, economic mismanagement and family rule, and install democracy,’ Asanga Abeyagoonasekera, senior fellow at Millennium Project in Washington, told CNBC.”

Europe Watch:

April 5 – Reuters (Julien Ponthus and Sudip Kar-gupta): “French stocks and bonds fell on Tuesday as markets started to acknowledge the risk of far-right candidate Marine Le Pen winning this month's presidential elections against incumbent Emmanuel Macron… Le Pen, whose presidential campaign has gained momentum in recent days, on Monday captured 48.5% of voter intentions in an opinion poll of a likely runoff against Macron, the highest score she has ever notched.”

April 4 – Reuters (Krisztina Than and Gergely Szakacs): “Emboldened by a fourth consecutive landslide election victory, Hungarian Prime Minister Viktor Orban is expected to dig in against energy sanctions on Russia and toughen his stance in talks with Brussels to unlock frozen EU funds. Nationalist Orban… will likely continue to reject any EU sanctions on Russian oil and gas… Using his strong mandate, Orban will also entrench his conservative policies at home and could attempt to squeeze out foreign companies in some sectors like retail where Hungarian ownership is still not dominant, as his Fidesz party aims to form its own class of loyal industrialists.”

April 4 – Reuters (Miranda Murray and Sarah Marsh): “Investor morale in the euro zone fell to its lowest level in nearly two years in April, a survey showed…, pointing to the beginning of a recession in the second quarter of 2022… A current conditions index fell to -5.5 from 7.8, its lowest level since April last year, while an expectations index fell to -29.8 from -20.8, its lowest level since December 2011.”

EM Bubble Watch:

April 8 – Bloomberg (Andrew Rosati and Matthew Malinowski): “Latin America’s central bankers are facing renewed pressure to extend aggressive interest-rate hikes after consumer prices stormed past estimates across the region, driven by soaring costs of raw materials. March’s inflation blew past even the most pessimistic forecasts in Brazil and Chile… That follows worse-than-expected price data in Colombia, Peru and Mexico… Brazil’s monthly inflation soared the most since 2003 as gasoline skyrocketed by 6.95%. Chile’s consumer prices posted the biggest monthly gain in roughly three decades as bread surged by 5.9% and energy rose by 2.6%.”

April 8 – Reuters (Marcelo Rochabrun): “Marcelo Gonzales is tired and angry about rapidly increasing living costs in his dusty village on Peru's desert coast, where food and fuel inflation inflamed by the war in Ukraine has ignited protests that threaten to destabilize the government. The social upheaval in the Andean country underscores how the impact of Russia's Feb. 24 invasion of Ukraine is rippling around the world, with leaders in Sri Lanka and Pakistan also under public pressure over difficult economic conditions. Inflation in Peru has reached its highest level in a quarter of a century, hammering people already hit hard by the coronavirus pandemic since early 2020.”

April 4 – Bloomberg (Baris Balci): “Turkish inflation soared to a fresh two-decade high in March, leaving the lira increasingly vulnerable by depriving the currency of a buffer against market selloffs. Consumer prices rose an annual 61.1% last month… up from 54.4% in February. Annual producer inflation was in triple digits for a second month and the core index of prices, which excludes food and energy items, increased more than forecast to over 48% from a year earlier.”

Japan Watch:

April 6 – Bloomberg (Yuko Takeo, Yoshiaki Nohara and Komaki Ito): “A weaker yen has long been considered a boon for Japan’s economy, helping blue-chip exporters such as Toyota Motor Corp. But that narrative is increasingly in question as the yen’s recent plunge aggravates the impact of surging commodity prices, hitting some businesses and consumers much harder than before. ‘The negative effects, or the risks from the weaker yen we’re now seeing, are unprecedented,’ said Eiji Hashimoto, chairman of the Japan Iron and Steel Federation.”

April 7 – Bloomberg (Min Jeong Lee and Toru Fujioka): “In most of the world, exchange-traded funds are simply tools that allow investors to track a certain set of stocks. In Japan, they’ve been saddled with everything from propping up the market and boosting inflation, to accelerating economic growth, improving corporate governance and even encouraging gender equality. Such wide-ranging goals have led the Japanese central bank to amass a whopping 80% of the country’s ETFs—equivalent to about 7% of its $6 trillion stock market—in less than a decade… The Bank of Japan has also outpaced peers with its $3.7 trillion in net bond purchases.”

Covid Watch:

April 7 – Bloomberg: “Shanghai is transforming conference centers and conscripting neighboring provinces to create isolation facilities for hundreds of thousands of people, a sign of its commitment to a zero tolerance approach to Covid-19 amid China’s worst outbreak to date. The Chinese financial hub is adding tens of thousands of beds to what are already some of the world’s biggest isolation sites as it sticks to a policy of quarantining all those positive for the virus, regardless of severity, plus everyone they interacted with while infected. Nearly 150,000 people have been identified as close contacts and put into isolation. More than 100,000 others are considered secondary contacts and are being monitored…”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 5 – Reuters (Gloria Dickie): “Drastic cuts to fossil fuel use. Growing forests and eating less meat. These are just some of the actions needed in this decade to contain global warming to 1.5 degrees Celsius above preindustrial temperatures, a major report by the U.N. climate science agency said… Despite climate change warnings issued by the Intergovernmental Panel on Climate Change (IPCC) since 1990, global emissions have continued to rise in the last decade, reaching their highest point in history. The result: global emissions are on track to blow past the 1.5 degrees C warming limit envisioned in the 2015 Paris Agreement and reach some 3.2 degrees C by century's end.”

April 4 – Financial Times (Clive Cookson): “Almost every person on the planet is exposed to air pollution that exceeds safe limits, the World Health Organization warned as it launched a new air quality database. Ninety-nine per cent of people breathed in air that sometimes or always exceeded harmful levels, the health body said… as it highlighted the urgent need to curb pollution caused mainly by burning fossil fuels.”

April 3 – CNBC (Emma Newburger): “On the drought-stricken land where Pinal County farmers have irrigated crops for thousands of years, Nancy Caywood stopped her pickup truck along an empty canal and pointed to a field of dead alfalfa. ‘It’s heart wrenching,’ said Caywood, a third-generation farmer who manages 247 acres of property an hour outside of Phoenix. ‘My mom and dad toiled the land for so many years, and now we might have to give it up.’ Farming in the desert has always been a challenge for Arizona’s farmers, who grow water-intensive crops like cotton, alfalfa and corn for cows. But this year is different. An intensifying drought and declining reservoir levels across the Western U.S. prompted the first-ever cuts to their water supply from the Colorado River.”

April 6 – Bloomberg (Shelly Banjo): “Major crime in New York City rose by 36.5% in March from a year ago despite Mayor Eric Adams’s efforts to reduce a spike of incidents that have persisted since the pandemic began. Citywide shooting incidents increased by 16.2%... The number of homicides fell 15.8% from a year ago, robberies rose by 48.4% and burglaries jumped by 40%...”

April 3 – Financial Times (Kathrin Hille): “The car industry’s multibillion-dollar bet on electric vehicles was built on a single premise: that batteries would carry on getting cheaper. In 2019, Volkswagen executives even brandished charts predicting a steady decline in battery costs, as they laid out their ambition to consign the combustion engine to history. For years the industry was proved right: battery costs fell from $1,000 per KWH for the first models more than a decade ago to about $130 in 2021… But Russia’s invasion of Ukraine threatens to halt the slide. Prices of nickel, lithium and cobalt — key raw materials for battery manufacturing — were already rising because of global demand. But with Russia accounting for 11% of the world’s nickel, and supply chains already stretched, the war has sent the cost of such commodities skyrocketing. The price of these three metals required in a 60KWh battery, enough for a large family sport utility vehicle, has risen from $1,395 a year ago to more than $7,400 in early March…”

Leveraged Speculation Watch:

April 6 – Bloomberg (Hema Parmar and Katherine Burton): “Year after year, the largest hedge funds that sprung from Julian Robertson’s Tiger Management posted stellar results. But in 2022, they’re losing money on both of their favored trades: Technology giants and unicorns. Chase Coleman, Philippe Laffont and Andreas Halvorsen -- so-called Tiger cubs -- all rode long positions in the tech sector as valuations climbed, only to suffer as sentiment shifted amid volatile markets… Coleman’s Tiger Global Management saw its hedge fund plunge 34% in the first three months of the year, while Laffont’s Coatue Management and Halvorsen’s Viking Global Investors fell 9.9% and 7.9%, respectively. Another Tiger offshoot, D1 Capital Partners, sank 16% in that time.”

April 4 – Financial Times (Robin Wigglesworth and Jamie Powell): “Cathie Wood has caught a fair bit of flak for flamboyantly incinerating billions of dollars lately, but Charles Payson Coleman III’s bets are fizzling nearly as badly. Bloomberg reported over the weekend that ‘Chase’ Coleman’s flagship hedge fund at Tiger Global, the biggest and most successful of Julian Robertson’s protégés, lost a thumping 34% in the first three months of 2022. Given that Tiger lost 7% in 2021, this means Coleman’s entire 48% gain in 2020 — which personally netted Coleman an estimated $2.5bn — has evaporated, and then some.”

Geopolitical Watch:

April 5 – CNN (Jeremy Herb and Ellie Kaufman): “The top US military officer told lawmakers… the world is becoming more unstable and the ‘potential for significant international conflict is increasing, not decreasing.’ Chairman of the Joint Chiefs Gen. Mark Milley and Defense Secretary Lloyd Austin appeared before the House Armed Services Committee in their first testimony before Congress since Russia's invasion of Ukraine. The two Pentagon leaders said the threats from both Russia and China remain significant… Milley said that Russia's invasion of Ukraine is ‘the greatest threat to peace and security of Europe and perhaps the world’ in his 42 years serving in the US military, but added it was ‘heartening’ to see the world rally around Ukraine. ‘The Russian invasion of Ukraine is threatening to undermine not only European peace and stability but global peace and stability that my parents and a generation of Americans fought so hard to defend,’ Milley said.”

April 7 – Bloomberg (Belinda Cao): “Chinese Foreign Minister Wang Yi says if U.S. House Speaker Nancy Pelosi visits Taiwan, it will be a ‘malicious provocation’ violating China’s sovereighty... Wang says the planned visit is gross interference in China’s domestic affairs, and will send a ‘extremely dangerous’ political signal to the world. China will ‘resolutely’ counteract, and all consequences will be borne by the U.S.: Wang.”

April 2 – Associated Press (Hyung-Jin Kim): “The influential sister of North Korean leader Kim Jong Un called the South Korean defense minister a ‘scum-like guy’ for talking about preemptive strikes on the North, warning Sunday that the South may face ‘a serious threat.’ Kim Yo Jong’s statement came amid heightened tensions between the rival Koreas over the North’s spate of weapons tests this year, including its first intercontinental ballistic missile launch in more than four years. Some experts say her statement could signal that North Korea will conduct more significant weapons tests soon and take a hardline stance on South Korea.”

Friday Evening Links

[AFP] UK sending Ukraine 'high-grade' weaponry after station attack

[Yahoo/Bloomberg] Stocks, Bonds Fall as Tough Week Comes to End: Markets Wrap

[Reuters] Oil prices settle up 2%, post weekly loss on stockpile releases

[Bloomberg] Summers Sees Consensus Building Toward Inevitable U.S. Recession

[CNBC] As inflation bites and America’s mood darkens, higher-income consumers are cutting back, too

[Politico] The White House is freaked out that Putin's next big win could be in Paris

[Guardian] Desperation amid food shortages in Shanghai as Covid lockdown bites

[MSN/WP] Nine ways Russia botched its invasion of Ukraine

[MSN/WP] China is Russia’s most powerful weapon for information warfare

[FT] Federal Reserve’s wind-down of its balance sheet drags US stocks lower for the week

[FT] LME chief calls for scrutiny of private deals in nickel probes

Friday Afternoon Links

[Yahoo/Bloomberg] Ukraine Update: U.S. Deploys Patriot Missile System to Slovakia

[Reuters] Russia complains to Turkey over drones sales to Ukraine

[Yahoo/Bloomberg] Stocks Drift, Bonds Fall as Tough Week Nears End: Markets Wrap

[Reuters] Benchmark Treasury yield hits 3-yr high; dollar index reaches 100

[Reuters] Oil prices set for weekly fall on stockpile releases

[Yahoo/Bloomberg] Dollar Surges to Highest Since Mid-2020 as Treasury Yields Jump

[Yahoo/Bloomberg] Ukraine Corn, Wheat Exports Will Plummet Further, U.S. Says

[Reuters] U.S. bond funds post outflows for 13th week in a row

[Yahoo/Bloomberg] ECB Is Crafting Crisis Tool to Deploy If Bond Yields Jump

[Yahoo/Bloomberg] Big Short Keeps Nickel Market on Edge One Month After Squeeze

[Reuters] A "recession shock" is coming, BofA warns

[Yahoo/Bloomberg] Russia Pivots to Shield Economy With Surprise Jumbo Rate Cut

[Reuters] Explainer: What will the EU do about Hungary's Orban?

[Reuters] Around 1 in 13 people in England had COVID-19 last week: ONS

[WSJ] Interest-Rate Surge Ripples Through Economy, From Homes to Car Loans

[WSJ] Shanghai’s Omicron Outbreak Corners Chinese Leader

[FT] Macron and Le Pen trade insults ahead of French election